Swiss Re decries ‘regulatory fragmentation’ as one factor discouraging insurers from investing in high-yield infrastructure projects

Policymakers needs to create a “global infrastructure asset class” in order to encourage insurance carriers and other institutional investors to put their money in long-term infrastructure loans — including transport, utilities, health care and education — suggests a recent report from Swiss Reinsurance Company Ltd. and the Institute of International Finance (IIF).

Zurich-based Swiss Re and IIF jointly released Feb. 25 a report, titled “Infrastructure Investing. It Matters,” which includes a wish list of policy decisions that would support investment in long-term infrastructure. The Institute of International Finance (IIF) is a global association of more than 475 financial institutions.

IIF and Swiss Re include recommendations to “strengthen the role of institutional investors and facilitate infrastructure investing.”

By long-term infrastructure, Swiss Re and IIF are referring to investments in non-residential assets with a life of 25 to 60 years, such as transport, communication, utilities, manufacturing, retail, health and education.

The recovery from the financial crisis from 2008 “has been weak,” with unemployment “stubbornly high,” the report suggests.

“This environment is not supportive of institutional investors’ appetite to make long-term commitments,” according to the report. “Many institutional investors have sought refuge in ‘safe assets’ since the onset of the financial crisis, and thus have the potential to increase their holdings of long-term assets.”

There has been an increase in “regulatory fragmentation …  as a number of national policymakers have moved ahead of global concepts, with the most recent example being the Fed’s proposal for stricter bank leverage and liquidity rules,” according to the report.

“While making regulatory capital charges dependent on an investment’s maturity profile is a sensible approach, there is a risk that for insurers specifically, the potentially high Solvency II standard formula capital charges for long-term assets will affect decisions on asset allocation.”

Therefore, Swiss Re and IIF “consistent global regulatory roadmaps across sectors,” and a review of the risk weighting of infrastructure loans and corporate bonds.

Long-term investment in infrastructure debt “can have significantly different risk patterns than corporate debt, which is not adequately reflected in the proposed capital charges,” the report contends.

“Furthermore, the global systemic risk debate has now shifted its focus to non-banking institutions including insurers, with a list of global systemically important insurers (G-SII) released in July 2013 by the Financial Stability Board (FSB), and a similar list for reinsurers expected in July 2014,” according to the report.

“The related uncertainty around the regulatory requirements, such as Basic Capital Requirements (BCR) and Higher Loss Absorbency requirements (HLA), may reduce insurers’ and reinsurers’ willingness to undertake longer-term, more illiquid commitments.”

The report includes a “wish list” of actions that IIF and Swiss Re suggests could encourage investment in infrastructure.

For example, there should be a “transparent, harmonized and accessible infrastructure asset class to attract long-term investors.” Swiss Re and IIF also contend that loans for infrastructure projects should be standardized, with an assigned credit rating and regular, standardized reporting and disclosure to bond investors. There should also be “establishment of a common governing law and aligned contract terms with clear rules for amendments, consents and waivers.”

Although long-term investing is “important for economic growth,” Swiss Re and IIF state that “uncertainty regarding regulatory and political developments further reduces market participants’ appetite to commit long-term capital.”

As a result, “there is a risk that the emerging infrastructure financing gap will not be closed.”

That gap refers to an estimated requirement for annual infrastructure spending of US$4.3 trillion in 2030, up from US$2.6 trillion annually in 2011.